Cyprus parliament rejects bank deposit levy

Fate of sovereign bailout for Cyprus unclear after parliament vote

By

PolyaLesova

NEW YORK (MarketWatch) — The Cypriot parliament on Tuesday rejected a proposed financial bailout that would have included an unprecedented and controversial levy on bank deposits, throwing the country’s financial future into doubt and forcing the government and its creditors back to the negotiating table.

In Nicosia, 36 parliament members voted against the controversial tax on Tuesday evening, while 19 members from the ruling party of President Nicos Anastasiades abstained, according to media reports. No one voted in favor of the proposal, which had sparked widespread protests in Cyprus and rattled global financial markets for two days. Read The Wall Street Journal’s story on the rejection of the tax.

It’s unclear what happens next in Cyprus, but the nation’s sovereign bailout is now in doubt. The next days may potentially bring more talks between Cyprus and its euro-zone partners, or alternatively Cyprus may seek financial help from Russia.

If Cyprus ends up on the brink of default, the situation could deteriorate quickly — in a worst-case scenario leading to the nation’s exit from the 17-nation euro zone and threatening the future of the currency bloc.

The European Central Bank said it would provide liquidity to Cyprus as needed within existing rules, according to Bloomberg News Tuesday.

Cyprus's banks close through Thursday

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Cyprus's banks will remain closed through Thursday while the country debates a tax on depositors.

Cyprus became the epicenter of the euro-zone financial crisis over the weekend mostly because of a plan to introduce a one-off tax on bank deposits as a precondition for the nation to receive a bailout of 10 billion euros ($12.96 billion) from international lenders. The euro zone and the IMF have said they can contribute up to €10 billion to the bailout, and have asked Cyprus to raise €5.8 billion in additional revenue — notably through a tax on bank deposits, an unprecedented move in the currency bloc’s long-running debt crisis.

Cyprus subsequently sought to shield small depositors, with the rejected draft bill proposing not to tax savers with less than €20,000 (around $26,000) in their bank accounts.

While the plan would have protected small savers, it risked falling short by €300 million of the €5.8 billion target required by the euro zone and the International Monetary Fund, according to The Wall Street Journal.

Deposits with between €20,000 and €100,000 would have incurred a one-time tax of 6.75% and those over €100,000 would have been taxed at a 9.9% rate, according to the Journal. The original plan, which was met with widespread protest and caused a run on ATMs, proposed taxing deposits of all sizes.

Adding to the turmoil, media reports said Michalis Sarris, the finance minister of Cyprus, had offered his resignation, but the president had declined to accept it. Sarris later said there was no truth to reports that he had resigned, according to Reuters.

The situation in Cyprus roiled global markets on Monday and weighed on the euro
EURUSD, -0.81%
Most European stock markets finished with losses Tuesday, particularly the Greek stock index, which slumped 3.9%.

On Monday evening, euro-zone finance ministers, known as the Eurogroup, held a call to discuss Cyprus. In a statement issued after the call, Eurogroup President and Dutch Finance Minister Jeroen Dijsselbloem said the proposed levy on depositors was a “one-off measure.”

“The Eurogroup continues to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below €100,000,” Dijsselbloem also said, signaling flexibility as to how exactly the measure is implemented.

However, he emphasized that Cypriot authorities still need to raise €5.8 billion via the measure since international lenders are willing to provide only €10 billion in financial assistance.

Authorities in Cyprus have extended the temporary bank holiday through Wednesday. The stock market also will be closed.

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